CapitaLand Commercial Trust - RHB Invest 2017-07-13: GSCP Redevelopment Gets The Green Light

CapitaLand Commercial Trust - RHB Invest 2017-07-13: GSCP Redevelopment Gets The Green Light CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - GSCP Redevelopment Gets The Green Light

  • CapitaLand Commercial Trust (CCT)’s plans to redevelop GSCP into an integrated development along with its JV partners came in line with market expectations and is mildly positive. 
  • The total redevelopment cost of SGD1.82bn was within our expectations and the target yields of 5% pa sounds reasonably attractive. However, concerns still remain on how management plans to offset the DPU shortfall arising from a string of recent divestments. 
  • We also expect some near-term overhang from the conversion of convertible bonds to equity, with the share price currently trading at ~17% premium to conversion price. 
  • Our Target Price of SGD1.68 (2% upside) is unchanged for now, pending a review of its post 2Q17 results to be released next week. Maintain our call to TAKE PROFIT.

What’s New? 

  • CapitaLand Commercial Trust (CCT) and its JV partners have announced plans to redevelop the Golden Shoe Car Park (GSCP) into an integrated development at an estimated total cost of SGD1.82bn. (see CapitaLand Commercial Trust announcement dated 2017-07-13: Joint venture with CapitaLand and Mitsubishi Estate Co., Ltd. to redevelop Golden Shoe Car Park)
  • Similar to the Market Street Car Park (MSCP) redevelopment (now CapitaGreen), this project would be jointly developed by CCT (45% stake), CapitaLand (45%) and Mitsubishi Estate Co Ltd (10%).
  • The 51-store integrated development would have a total GFA of 1m sqf and would comprise: office (NLA – 635,000 sqf, 80% GFA), serviced residence (14% GFA, 299 rooms to be managed by Ascott), food centre (4% of GFA) and ancillary retail (2%). CCT would be selling the car park to the joint venture at a price of SGD161.1m, 10% above the average valuation of GSCP with a redevelopment potential, and 14.3% above its valuation (end-Dec 2016) as a car-park facility. 
  • There is no extension to the existing land lease, which has 64 years remaining. Construction of the project would commence in 1Q18F and expected to be completed by 1H21F.

Our View 

Target yield on cost of 5% pa reasonably attractive. 

  • The redevelopment cost (including differential premium) of SGD1.82bn is within our previous expectations of SGD1.5-2bn. 
  • Based on CCT’s assumed office rents of SGD12-14 psf and serviced residences RevPAR of SGD255-270 psf, which we believe is achievable, the project is expected to deliver a yield on cost of about 5% pa. The target yields are reasonably attractive compared to recent office property transactions of 3-3.5% net property income (NPI) yields.

Gearing to remain modest 33% offering room for more acquisitions. 

  • CCT expects to fund the project by a combination of equity from divestment proceeds (40%) and the remaining through debt. Post transaction which includes all its recent divestments proceeds (Wilkie Edge, One George Street – 50% stake and GSCP) and assuming a full conversion of convertible bonds, gearing is expected to remain at a modest ~33%. 
  • Assuming a comfortable headroom of 40%, this provides headroom of ~SGD1bn. We expect management to remain active in the acquisition space and potentially acquire a minority stake in Asia Square Tower 2 along with CapitaLand, which, based on a media report, is in exclusive negotiations with the vendor.

No decision yet for distribution of divestment proceeds to bridge DPU shortfall. 

  • Management indicated that it is currently exploring various options and has not made any decision on whether to use the divestment proceeds to bridge the DPU shortfall arising from recent divestments.

Call option to purchase remaining stake. 

  • Similar to CapitaGreen, CCT has a call option to acquire the remaining interest at market valuation, subject to a minimum price that is based on the total development cost (excluding financing costs) of the office and ancillary retail components less any NPI attributable to office development, compounded at 6.3% pa. 
  • There is also a drag-along right over the serviced residence component, subject to a minimum price that is based on the total development cost (excluding financing costs) of the serviced residence component less any NPI attributable to serviced residences, compounded at 5% pa. 
  • CCT may exercise the call option at any time over a period of five years after the issuance of the temporary occupation permit (TOP) (compared to two years for MSCP).
  • We make no adjustment to our model for now pending CCT’s 2Q17 results, slated to be released next week (19 Jul). 
  • Our TAKE PROFIT recommendation is maintained as we believe the positives have been factored in the price. Additionally, we also expect some overhang from the recent conversion of convertible bonds. 
  • Our DDM-derived Target Price of SGD1.68 (COE of 7.8% and TG of 1.5%) is unchanged for now.

Vijay Natarajan RHB Invest | 2017-07-13
RHB Invest SGX Stock Analyst Report TAKE PROFIT Maintain TAKE PROFIT 1.680 Same 1.680